Recently, Professor Basil Moore (“What Tito could have done”) pointed out the extraordinary economic and social punishment meted out by the Reserve Bank’s very high real interest rate policy, amid desperate unemployment.
The current singular aim of inflation targeting is the mirror image of the International Monetary Fund’s narrow market fundamentalism, which suits only developed economies driven by rising aggregate demand. It has little to do with south Africa’s dual (global and marginalised) economy driven by rising costs, including the need for massive social grants.
It is high time the government altered the Charter of the South African Reserve Bank. The United States Federal Reserve, for instance, is concerned primarily with maintaining employment, secondly with currency stability and only thirdly with inflation. A focus on inflation is a blunt tool that disregards the destructive effect of high interest rates on employment.
Moore lamented the recent missed opportunity to lower the base rate by 50 basis points. In fact, he went on to argue that the ideal repo rate would be 2% if the government, labour and business worked together to create a “moderate” price climate — 5,5% lower than today’s 7,5% rate!
Present arrangements act to attract speculative foreign investors — 90% of all trade in the rand — to shore up very low domestic savings.
The (again) strong rand drags down exports and revenues and costs jobs while low import prices put pressure on the current account, encouraging consumption and help to drive house prices up.
The balance of economic forces favours those with capital, particularly foreigners. When growth takes hold here and abroad, we will once again go straight to punishing interest rates out of sync with our trading partners.
Again, monetary policy will hurt job creation and force many companies into liquidation and many citizens into poverty.
The Reserve Bank cannot bring greater certainty and stability to the exchange rate, hold inflation low for long or indefinitely avoid a fresh round of interest rate hikes unless a broader national purpose is articulated and institutionalised.
Its limited mandate and concentration on the interest rate as the singular instrument regarding inflation exposes South Africa to false policies.
Issues such as domestic savings incentives, employment creation, the wider issue of the foreign exchange regime and the ongoing dependence on foreign capital inflows to finance economic growth, and any deficit on the current account, are ignored. They should be treated as a set of policy issues and instruments alongside the interest rate.
We have an opportunity to do something more important than just manage inflation. Although interest rates have tracked falling inflation, high “real” interest rates are unaffected.
South Africans with mortgage bonds and debts give their little spare cash to the banks, while high interest rates serve to lure and hold foreign investors and provide the foreign cash to finance the trade gap.
It is a pro-foreign, pro-capital, anti-citizen set-up, which gives the country at a discount to foreigner owners.
Moore is right — a much lower repo rate is needed. But his list of benefits a lower rate would bring is naïve, because it would first stoke house and capital asset prices and lead to further pressure on the current account.
An intermediary step is needed — to lower the interest rate closer to the inflation rate, as Western countries have done, even if that requires a further drop of 300 to 400 basis points.
Right now the sentiment is that high oil prices demand no further interest rate cuts, so that spending and its drain on the current account are tempered. The truth, rather, is that high petrol prices already temper household and company spending.
How can interest rates be lowered 3% to 4% without raising consumption? Bank computers can be instructed to lower the effective rate on loans and mortgages by just 0,5%. The balance, 2,5% to 3,5%, is still charged, while those “costs” are diverted to bank client savings accounts.
The savings would total R19-billion and R26-billion annually at 2,5% and 3,5% respectively on bank loans currently worth some R750-billion.
These large sums could be lent to a national investment fund that “contracts out” their use to existing agencies to lend to companies or to government. Rates would be low, to fund what should be high public and private investment levels in mining, other resource sectors, manufacturing and economic and social infrastructure. This would ensure that the monies “saved” do not end up financing enhanced bank business through the granting of bigger consumption loans.
Interest rates would come down sharply to help regain international competitiveness, to lower the rand so that exports rebound, to take up the slack of unused productive capacity, now near 20%, and to fund new private investment and government’s need to accelerate capital and social spending.
With only a mild and lagged fuelling of consumer and import demand, South Africa could realise the many gains low interest rates bring to a poverty-racked economy. The intervention would raise domestic savings, channel them into investment, and reduce the reliance on foreign capital.
These are all national socio- economic goals the banks do not care about and the Reserve Bank currently does not act on. The subsequent receipt of interest and other earnings to individual and company “savers” would help offset the effects of any higher interest rates in future.
Norman Reynolds is a development economist